Salesforce shares jumped by 27 per cent on Wednesday, adding more than $50bn to the company’s value, after it signalled that the surge in cloud software spending sparked by the pandemic had spread to the sort of large-scale, complex transactions that underpin its own business.

Company results late on Tuesday revealed that Wall Street had been underestimating the resilience of its business and out-of-hours trading had suggested the shares would open strongly, but momentum built as the morning progressed.

Concerns that the company would suffer as large companies and governments pulled back from longer-term “digital transformation” projects while they dealt with the crisis had led Salesforce to issue a downbeat forecast for its latest financial quarter.

But new business bookings had returned to normal seasonal levels, despite the challenge of selling large-scale contracts that normally rely on face-to-face contact.

The number of new contracts worth more than $1m rose 63 per cent from the same quarter a year ago, said Marc Benioff, the chief executive.

The disruption to Salesforce’s normal sales methods actually brought a boost to profits in the quarter, as spending on travel and entertainment dropped and the company was forced to find new ways to close deals. Salesforce’s operating profit margin climbed to a record 20.2 per cent, well ahead of the 16 per cent that had been expected.

Wednesday’s big share price jump came on top of a 4 per cent increase the day before, after it was revealed the company would be joining the 30-strong Dow Jones Industrial Average next week. The index is being reshuffled to ensure tech stocks are fully represented. By lunchtime trading in New York on Wednesday, the company had a market capitalisation of $246bn.

Line chart of Market cap ($bn) showing Untitled

Technology shares have led a powerful market rally since the depths of the coronavirus crisis in March, but Salesforce had lagged behind some of its peers. The sharp reaction to the latest results reflected relief after the company’s cautious projections three months ago, said Alex Zukin, an analyst at RBC Capital Markets.

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“They set a low bar. Bigger deals got put on hold,” he said. Investors were also relieved that the company appeared to be forswearing any new acquisitions after a spate of dealmaking, he added.

The high valuations of software companies meant that “for a company like Salesforce we don’t really see an M&A environment”, Mr Benioff said on a call with analysts.

Pointing to the $20bn Salesforce spent on buying Mulesoft and Tableau since 2018, he added that the deals would have been prohibitively expensive in the current market. “We would not have been able to buy them,” he said. “There is no way, no how.”

The return to strong growth, even as profit margins reached a record, had analysts scrambling to raise their forecasts for the rest of this year. Salesforce said it expected revenue of close to $5.25bn for the current quarter, about 5 per cent ahead of Wall Street expectations.

It also raised its operating profit margin target for this year by three-quarters of a percentage point, though it said it planned to bring forward investment spending from next year, holding down the rate of increase.

Salesforce’s revenue rose 29 per cent to $5.15bn in the three months to the end of July, $250m ahead of expectations. Pro forma earnings per share of $1.44 were partly boosted by a 55 cent gain from marking investments to market, and topped expectations of 67 cents a share.

Net income rose to $2.6bn from $91m the year before, partly on a one-off $2bn tax benefit.

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Via Financial Times